Acquisition frenzy continues

Announces more acquisitions. Mapletree Logistics Trust (MLT) announced its intention to acquire three distribution centers in the Kanto region (Greater Tokyo) of Japan. MLT has signed a binding Memorandum of Understanding with the vendor – a logistics facilities development and management company. The three assets are on long-term leases of between eight and 10 years. The purchases are expected to be completed by end 3Q10.

Financed fully through debt. The total acquisition cost is estimated at JPY13b or S$201m. The properties will be acquired at an average initial NPI yield of 7.3%, compared to an average implied property yield of 5.0% on MLT’s existing Japan portfolio. The purchases will be fully funded by debt, increasing MLT’s leverage to approximately 43.6% debt-toassets. On a pro forma basis, the manager expects an accretion of 0.33 S cents (+5.5%) over the annualized 1H10 DPU of 6.0 S cents. Note MLT estimates that accretion drops to +0.01 S cents (+0.2%) if the acquisitions were 60% equity financed at an issue price of S$0.84, a 5% discount to the current price.

Equity issue likely, in our view. Since Dec 09, the manager has announced or completed S$430m of acquisitions, all financed by debt. We note that MLT is fast approaching its 45% medium-term leverage target. At the same time, MLT looks far from sated with its acquisition spree (in our opinion), with both sponsor and third party assets up for grabs. As such, we believe equity fund-raising (EFR) is likely in the next six to 12 months, and sooner rather than later. At the recent 2Q10 analyst briefing, the manager indicated that any potential EFR is likely to take the form of a private placement, citing the faster / more flexible time frame and lower discount versus rights issues. MLT can issue up to 20% of its existing unit base through a private placement. The manager also emphasized that the purpose of any EFR would be to allow MLT to continue to grow rather than to de-leverage.

DPU estimates adjusted upwards. We have adjusted our earnings estimates to account for the impact from these acquisitions with contributions estimated from 01 Oct 2010 onwards. This raises our FY10-11F DPU estimates by 1.7% and 5.5% respectively to 6.3 S cents and 7.0 S cents. Our fair value estimate is also up from S$0.86 previously to S$0.89. With uncertainty about the timing and quantum of any EFR, and an estimated total return of 7.7%, we maintain our HOLD rating on MLT.

MapletreeLog to buy 3 properties in Japan

MAPLETREE Logistics Trust has signed a binding memorandum of understanding (MOU) with Kabushiki Kaisha A-Max to acquire three properties in Japan, its manager Mapletree Logistics Trust Management (MLTM) said yesterday.

The properties are the Iwatsuki Logistics Centre, a distribution centre and office in Iwatsuki, with a gross floor area (GFA) of 30,000 sq m; the Iruma Logistics Centre, a distribution centre and office in Iruma, with GFA of 26,000 sq m, and Noda Logistics Centre, a distribution centre and office in Noda, with GFA of 36,000 sq m. All the locations are in Saitama Prefecture, which is Toyko’s northern neighbour.

The properties will be acquired for a total of 13 billion yen, (about S$200 million). The vendor, A-Max, is a logistics facilities development and management company.

The acquisition is the sixth announced by Mapletree since December last year, totalling $430 million.

With the completion of all of these acquisitions, MapletreeLog will have a portfolio value of about $3.3 billion.

MLTM said the latest acquisition will have significant benefits arising from attractive net property income (NPI) yield and distribution per unit accretion. The properties are also 100 per cent leased for eight to 10 years, providing stable rental income, and are in good locations.

‘Given the low interest rates in Japan, it is likely that this acquisition will be funded predominantly by debt,’ said MLTM. ‘Any proceeds from equity issuance will likely be applied towards other acquisitions or refinancing of other more expensive debt in the portfolio to maintain a gearing below 45 per cent.’

MLTM chief executive Richard Lai said: ‘Japan’s logistics market remains attractive to us because it has breadth and depth that is currently unmatched elsewhere in Asia. We will continue to expand our portfolio in Japan by selectively acquiring yield-accretive logistics assets of good quality and location. We also seek to enhance the quality of our income stream through addition of good-quality customers to our diversified customer base. We will continue to focus on such accretive third-party acquisitions as a key strategy to grow our portfolio, and in turn, the returns to our unit-holders.’

Temporary occupancy weakness

• In line; maintain Neutral. 1H10 DPU of 3cts met Street and our expectations, forming 49% of our full-year estimate. Despite lower revenue from increased vacancy rates in Malaysia, Hong Kong and Singapore, 1H10 distributable profit grew 7.8% yoy, lifted by lower property expenses, lower borrowing costs, and the partial hedging of cash flows from Hong Kong and Japan. We maintain our estimates and DDM-based target price of S$0.86 (discount rate 8.6%) as we have already assumed moderate rental growth of 2% and S$357m worth of acquisitions for this year (of which S$186m has been realised). MLT offers dividend yields of 6.9% for FY10. We expect re-rating catalysts from announcements of accretive acquisitions, development work and any refinancing on improved credit terms in the near term.

• Net property income (NPI) flat qoq. 2Q10 NPI of S$45.8m was flat qoq as lower occupancy in Singapore, Hong Kong, Malaysian and Chinese was ameliorated by lower maintenance expenses and one-off provisions for doubtful debt in 2009. The partial hedging of Hong Kong and Japanese cash flows also supported distributable income despite currency losses against the strengthening S$.

• Portfolio occupancy of 97% as at Jun 10, down from 98% in Mar 10. Regions with declining occupancy were Malaysia (-5% pts); Hong Kong (-3% pts), Singapore (-1% pt) and China (-1% pt). Management attributed the shortfall in Malaysia (two properties) and Singapore (one) to conversion from single-user assets to multitenanted buildings in an attempt to lift rents further as leases expired in the quarter. Particularly for the two Malaysian assets, pre-commitments from new tenants would have lifted occupancy to 97-98%. The fall in Hong Kong’s occupancy was blamed on the departure of key tenant, Lane Crawford, when its lease expired. Management is confident of finding replacement tenants at positive reversions over preceding rents.

Moving up a gear

• DPU of 1.5 Scts in line, backed by stable portfolio occupancies

• Acquisition opportunities aplenty, raising forward assumptions by another S$100m

• Maintain BUY with raised TP of S$0.98

DPU of 1.5 Scts (+1.4% yoy, flat qoq). Gross revenue and net property income remained relatively flat at S$51.9m and S$45.8m respectively. Contributions from newly acquired properties were offset by weaker HKD/JPY vs S$ & frictional vacancies in S’pore, Hong Kong and Malaysia. Distributable income however increased by 8% yoy to S$30.9m due to lower average borrowing costs, translating to a DPU of 1.5 Scts.

Portfolio occupancies at 97%, heading up in subsequent quarters. Vacancy levels rise slightly in HK, Singapore and Malaysia this quarter due to MLT’s deliberate repositioning of assets as multi-tenanted buildings to further drive yields. Occupancies are expected to head back in the coming quarters.

An eye on 2012 refinancing (cS$700 m or 58% of debt expiring). MLT has sufficient facilities to repay S$100m debt expiring in 2H10. Management is keen to tap the bond market or its MTN program to term out its debt maturity profile.

Acquisitions worth S$117.5m to-date but further opportunities exist – we raise assumptions by another S$100m. Management is evaluating further opportunities & potential built-to-suit developments. In addition, its sponsor stands ready with another S$300m worth of assets that are completing/ competed to be injected into the REIT. With a myriad of growth opportunities, we raised our acquisition assumptions by another S$100m, funded on 40% debt and 60% equity basis, raising our TP by 5 Scts to S$0.98

BUY, TP S$0.98 based on DCF. MLT’s back on the growth path and we are excited over its prospects in the medium term. Maintain BUY, TP revised to S$0.98 on higher forward acquisition assumptions. Forward yields of 6.9-7.3% remains attractive.

Occupancy dips as manager re-positions assets

2Q10 below expectations. Mapletree Logistics Trust (MLT) reported 2Q10 gross revenue of S$52m, flat YoY and up a marginal 1.1% QoQ. Net property income of S$45.8m inched up 0.3% YoY and 0.1% QoQ. Unitholders will receive a payout of 1.5 S cents, up 1.4% YoY and flat QoQ. DPU was 5% below our 1.58 S cents estimate as positive contributions from recent acquisitions were offset by higher vacancy rates. As at 30 Jun, MLT recorded portfolio occupancy of 97%, down from 98% three months ago. This was due to higher vacancies in Singapore (occupancy -100 basis points), Hong Kong (-300 bps) and Malaysia (-500 bps). We understand this is as the manager has chosen not to renew leases of certain singletenanted buildings because of unsatisfactory rent negotiations. Instead it is increasing its weighting to multi-tenanted buildings with three assets converted from single-user assets to multitenanted buildings during the quarter (two in Malaysia and one in Singapore).

2H10 could be stronger. To date, the manager has successfully renewed and replaced 42% of the leases due for renewal in 2010; approximately 10% of the portfolio gross revenue is due for renewal in 2H10. It noted some mild positive reversions (+0.3% to +0.5%). MLT said that “while the economic environment has shown signs of improvement, market sentiments remain cautious in the geographies in which [it] operates.” 2H10 income could be boosted (in our opinion) by full-year contributions from the three assets acquired in 2Q10 and also from contributions from Natural Cool Lifestyle Hub (expected purchase completion around Sep 2010). Additionally, with strong leasing enquiries, the manager believes occupancies should improve over 2H10.

Valuation. Our FY10 DPU estimate falls 3% to 6.2 S cents as we adjust our estimates for actual 1H10 results. With leverage of approximately 39.8% debt-to-assets (our estimateincluding the Natural Cool acquisition, 38.8% actual as at 30 Jun) versus a medium-term target of 45%, MLT has debt headroom for roughly another S$165m worth of acquisitions. MLT is likely to speed up its acquisition pace beyond that quantum, with S$300m worth of assets in its sponsor pipeline already at or nearing completion. As such, we believe equity fund-raising is likely in the coming months, potentially through another private placement. With an estimated 4.2% total return, we downgrade MLT to HOLD with a marginally higher S$0.86 fair value [prev: S$0.84]. Potential catalysts for an upgrade include announcements on substantial acquisitions or development projects.